Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31% through December 23rd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like ServiceNow Inc (NYSE:NOW).
ServiceNow Inc (NYSE:NOW) has experienced an increase in hedge fund interest of late. NOW was in 86 hedge funds’ portfolios at the end of the third quarter of 2019. There were 77 hedge funds in our database with NOW holdings at the end of the previous quarter. Our calculations also showed that NOW ranks 20th among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
At the moment there are dozens of signals stock market investors use to assess publicly traded companies. Some of the most innovative signals are hedge fund and insider trading signals. Our experts have shown that, historically, those who follow the best picks of the top investment managers can outperform their index-focused peers by a solid margin (see the details here).
Philippe Laffont of Coatue Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind let’s go over the key hedge fund action surrounding ServiceNow Inc (NYSE:NOW).
What have hedge funds been doing with ServiceNow Inc (NYSE:NOW)?
At Q3’s end, a total of 86 of the hedge funds tracked by Insider Monkey were long this stock, a change of 12% from one quarter earlier. By comparison, 65 hedge funds held shares or bullish call options in NOW a year ago. With hedgies’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Coatue Management, managed by Philippe Laffont, holds the largest position in ServiceNow Inc (NYSE:NOW). Coatue Management has a $690 million position in the stock, comprising 5.9% of its 13F portfolio. On Coatue Management’s heels is Melvin Capital Management, led by Gabriel Plotkin, holding a $529.4 million position; the fund has 4.3% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors with similar optimism comprise Andreas Halvorsen’s Viking Global, Lone Pine Capital and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Praesidium Investment Management allocated the biggest weight to ServiceNow Inc (NYSE:NOW), around 10.44% of its 13F portfolio. SCGE Management is also relatively very bullish on the stock, designating 9.31 percent of its 13F equity portfolio to NOW.
Now, specific money managers have jumped into ServiceNow Inc (NYSE:NOW) headfirst. Viking Global, managed by Andreas Halvorsen, created the largest position in ServiceNow Inc (NYSE:NOW). Viking Global had $449.5 million invested in the company at the end of the quarter. Gabriel Plotkin’s Melvin Capital Management also initiated a $304.6 million position during the quarter. The other funds with brand new NOW positions are Josh Resnick’s Jericho Capital Asset Management, Aaron Cowen’s Suvretta Capital Management, and Brett Barakett’s Tremblant Capital.
Let’s now review hedge fund activity in other stocks similar to ServiceNow Inc (NYSE:NOW). These stocks are Norfolk Southern Corp. (NYSE:NSC), Prudential Public Limited Company (NYSE:PUK), Micron Technology, Inc. (NASDAQ:MU), and Schlumberger Limited. (NYSE:SLB). This group of stocks’ market values match NOW’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NSC | 46 | 1947473 | -8 |
| PUK | 11 | 58421 | 6 |
| MU | 67 | 3620548 | 5 |
| SLB | 49 | 1246666 | 8 |
| Average | 43.25 | 1718277 | 2.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 43.25 hedge funds with bullish positions and the average amount invested in these stocks was $1718 million. That figure was $5264 million in NOW’s case. Micron Technology, Inc. (NASDAQ:MU) is the most popular stock in this table. On the other hand Prudential Public Limited Company (NYSE:PUK) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks ServiceNow Inc (NYSE:NOW) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on NOW as the stock returned 59.1% so far in 2019 (through 12/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
